Markets fueled by improving sentiment and an expected uptick in global growth

Outlook: First quarter 2020

Economy

After peaking at a growth rate of 3.1 percent in the first quarter of 2019, the pace of the expansion in the U.S. economy has moderated, hovering around 2 percent. The modest rate of growth has been driven by the bifurcated state of our economy which
contains pockets of strength and weakness. Spending by consumers and the U.S. government has been solid, serving as the primary factors underpinning the recent expansion. In contrast, business investment and related capital expenditures declined in
the second and third quarters of 2019. The drivers of the reduced investment include slowing global growth and uncertainty related to the trade dispute between the U.S. and China. Looking forward, growth is expected to remain close to the long-term
trend, coming in around 2.0 percent. Strength from the Federal Reserve’s easy monetary policy and a healthy consumer is expected to be juxtaposed against improving, but disciplined investment policies by businesses as well as a moderation in
the growth of government spending.

In foreign economies, growth is expected to rebound in 2020 fueled by a number of factors. Sentiment is poised to improve given the de-escalation in trade relations between the U.S. and China as well as the anticipation of an orderly Brexit. In addition,
central banks around the world continue to pursue unusually accommodative monetary policies and many countries are simultaneously employing stimulative fiscal programs. The combination of improving sentiment and expansionary
policies is anticipated to create a more robust global economy in the coming year.

Inflation

Inflation moderated in the summer of 2019 with the Consumer Price Index falling to 1.65 percent last June. However, an uptick in energy and housing prices drove the November CPI up to 2.1 percent. That is a level consistent with the Federal Reserve’s
long-term target and an environment of sustainable growth. Looking forward, we expect price levels to remain contained given the prevalence of structural drivers. Structural headwinds create long-term suppressants to higher prices and include factors
such as the proliferation of technology and our aging population.

U.S. Dollar

The U.S. dollar has declined in recent months driven by lower U.S. interest rates and expectations for a rebound in foreign economies. The optimism has been driven by improving sentiment around the trade relationship between the U.S. and China, expectations
for an orderly Brexit and sustained stimulus by foreign central banks. Looking forward, we expect the U.S. dollar to remain elevated and trade close to its recent range.

Asset class

Cash/Money Market Instruments

Reflective of the three cuts to Federal Funds Rate in 2019, money market rates are down approximately 90 basis points since the beginning of the year. The sharp decline in cash and money market rates is not anticipated to continue. In fact, guidance from
members of the Federal Reserve suggests our central bank will pause on further rate changes for the foreseeable future. Their change in stance is predicated on a number of factors including the improvement in both market sentiment and economic fundamentals.
Given the stance of the Federal Reserve, short-term rates are expected to remain close to current levels in the coming months.

Intermediate Government/Credit Bonds

Bond yields declined in 2019 given the moderation in economic growth. However, corporate bond spreads, for both single A rated, and BBB rated bonds have continued to grind tighter. The persistent tightening has driven spreads to the low end of their historical
range and reflects both increased optimism towards continued economic growth as well as the insatiable appetite for yield. Given the current outlook, we expect interest rates and credit spreads to remain range-bound, close to current levels, in the
coming months.

Tax-Exempt Municipal Bonds

Following a strong year in 2019, it is hard to make a case for a meaningful decline in bond demand in 2020. Only an unlikely reversal in the U.S. tax overhaul or an unexpected global economic event seem powerful enough to cause such a shift. Beginning
the year with low absolute yields, we think total returns for municipals will be relatively modest in the coming year. However, the credit fundamentals of the sector are poised to remain stable. Consistent with recent trends, key challenges for this
segment of the market relate to underfunded pensions and our ever-growing health-care expenses.

U.S. Equity

Better than expected earnings, a de-escalation in trade tensions with China and a global wave of central bank stimulus drove stocks to record levels in 2019. Looking forward, we expect the stock market to continue its upward trajectory, driven by an increase
in earnings growth and a modest rebound in the global economy. Sustained monetary stimulus as well as improving sentiment from both the phase one trade deal with China and expectations for an orderly Brexit are expected to foster an improving global
environment. While we are positive in our outlook, we expect intermittent bouts of volatility as the development of a comprehensive trade framework with China will be an ongoing process and the trajectory of the economic expansion will exhibit some
volatility from quarter to quarter.

International Equity

In 2019 international equities had one of their best years since the Great Recession. In response to a weakening global economy, central banks worldwide eased their policies and some governments have implemented stimulative fiscal programs. These pro-growth
stances, coupled with improving sentiment from the de-escalation in the trade dispute and anticipation of an orderly Brexit, provided an improving backdrop for international stocks. As we progress into 2020, we expect these drivers and relatively
attractive valuations to allow foreign stocks to continue their upward trend. However, intermittent bouts of volatility are to be expected as noted in the U.S. equity outlook above.

Commodity

Commodity prices generally increased last year, but in the aggregate the gains were modest relative to the rise in prices for other assets. Oil prices were the outlier with an increase of nearly 30 percent in 2019 driven by fading recession fears as we
progressed through the year. Precious metals also performed well given a significant amount of skepticism toward equities throughout much of 2019. Looking forward, we expect the continuation of the economic expansion to result in rising prices for
source inputs, but the modest pace of growth will continue to act as a headwind to large, and broadly based, increases in commodity prices.

Potential opportunities & risks

Opportunities

The emergence of new technologies—The convergence of cloud computing, significant increases in computing power and the advent of the smartphone have created a connected world in which new technologies change the way we live. This
convergence has created a number of investment opportunities centered around long-term themes in which disruptive companies can capture high levels of market share in a relatively short period of time.

The evolution of finance—Technological advancements are disrupting traditional methods of banking, finance and transfers of cash. For example, we are experiencing a global shift from paper currency to electronic payments fueled
by the popularity of credit and debit cards. Electronic bill paying services and companies that facilitate cash transfers are also experiencing strong demand. This shift is still in its early stages and is expected to have a long runway as it is occurring
across both the developed and the developing economies.

A shift to easier monetary policy—Central banks worldwide have adopted an easing stance which provides support for the equity markets and a continuation of the economic expansion. The Federal Reserve was one of the drivers of the
market downturn in the fourth quarter of 2018 after providing guidance that suggested they would raise rates significantly. One year later central bankers worldwide have rapidly shifted policy in the other direction. Notably, recent comments from
Jerome Powell, Chairman of the Federal Reserve, suggest our central bank is inclined to leave rates low until there is evidence of sustained inflationary pressure.

Risks

Low growth rates & rising asset prices—Monetary policy has shifted to an easing bias as growth rates for earnings and the economy moderated last year. Recently, sentiment has improved, and investors are expecting a better global
economic environment in 2020. If growth does not improve as expected, asset values may decline.

Trade disputes & rising protectionist sentiment—Trade tensions between the U.S. and China de-escalated as we closed out 2019. However, the degree to which the existing tariffs will be removed, if at all, is not clear at the
time of this writing. In addition, the development of a comprehensive trade framework with China will be an ongoing process that will take time. In terms of our trade with Canada and Mexico, Congress made good progress on the USMCA trade agreement
in the closing stages of 2019. While there is more work to do on that agreement, it appears to be moving in the right direction. If new trade frameworks are not developed, tariffs are likely to be a persistent issue, resulting in a headwind to the
global economic expansion.

Increasing government regulation of technology companies—Several of the leading technology companies have established dominant market positions and have few competitors. If the power of these companies continues to increase, government
regulators may place them under greater scrutiny by assessing their privacy policies, acquisition plans and competitive practices.

Geopolitical risks—Conflicts in many parts of the world have escalated or have near-term catalysts that may result in a change in dynamics. We continue to monitor events across the Middle East and the South China Sea.

Debt related issues—Sovereign debt levels continue to grow throughout much of the world, generating conditions associated with low rates of economic growth. In response to the low growth rates, there has been a
meaningful shift in the willingness to use fiscal policy to stimulate these economies. However, if the initiatives are debt-financed, they run the risk of exacerbating the issue and creating more significant problems in the long-term.

Cybersecurity—Cybersecurity has become a significant issue as evidenced by the Equifax data breach as well as persistent attacks on both the international money transfer system, SWIFT, and on systemically important financial institutions.
The global cost of cybercrime has been estimated at $600 billion and acts as a tax or headwind to economic growth.